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if you're an investor in the stock
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market or if you're thinking about
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retiring this year you've got to give
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some long hard thought to 2025 for an
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investor you've just come off of two
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very strong years in the stock market
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for a retiree this is when you're about
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to start transitioning from putting
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money into your account to starting to
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take your money out of the account and
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there's three main enemies for all of us
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and and the first one is one you may
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have heard of but I want to use use it
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as a lead into Enemy Number Two so the
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first enemy is sequence of return risk
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which is How likely are you to get bad
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returns early in in as you're taking
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money out as a retire if you're taking
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money out as an investor now the the the
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pleasant cousin to sequence a return
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risk is dollar cost averaging if the
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market starts going down and you're
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putting money in that's a good thing for
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you but if you're taking money out the
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evil cousin of dollar cost averaging is
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sequence a return risk which is just a
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fancy way of saying you got unlucky so
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whether you're retiring or you're you're
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an investor and you have 10 years 20
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years from retirement looking at 2025 is
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important so let's start with sequence
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of return risk and then I'll get into
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the other two big enemies and there's an
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an article that was published on medium
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that I think is really good it's called
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sequence of return risk is overstated
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and the author is aravan and in in his
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case instead of using like the 4% rule
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he used a different method which is a a
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5% withdrawal rate but if the market
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starts going down you get the bigger of
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either or 5% of of your retirement
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account value or 95% of last year value
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so it's just a way to reduce you're
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spending if you get unlucky and you have
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that sequence of return risk and he
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looked at at several different periods
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let's start off
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1929 the the Great Depression you can
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see here using that somebody goes on
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nominal dollars if they had a million
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dollars which back then was a lot of
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money they would spend 50,000 a year and
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it drops down to 30,000 a year so that
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was a long time but time ago but what
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about in the modern stock history
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they're the worst year you could have
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retired according to him was 1966 as far
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as sequence or return risk you can see
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they start off at 50,000 in 15 years
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later that person is still taking
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roughly $50,000 a year out of the
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account and more recently if You'
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retired just before the great uh uh the
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dot bubble burst you can see You'd start
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off at
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$50,000 you'd drop down to a little over
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$41,000 and then go back up to the
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50,000 and then more recently the great
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financial crisis you'd start off at
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50,000 would bump up a little bit but
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then you'd go down to about
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$46,000 not that big of a deal given the
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extreme level of of stock market drop
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right top to bottom the S&P 500 was down
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almost 60% 60% the S&P 500 so um now he
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wants to go back and he wants to look at
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1966 more closely to share what the
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second enemy is so the first one is
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nominal dollars right 1966 as a reminder
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started off at at $50,000 it bottomed
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out at a little less than
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$45,000 so so what's the big deal it's
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it's not that big of a change well if
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you take inflation into account it is
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because look at this it's 13 14 years
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into retirement so in the next chart in
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this medium article he shows what the
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impact of inflation is and it's just
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devastating right that you go from
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50,000 and it's just a a one-way ride
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down for 15 years when you're taking
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inflation into account to the point
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where this family is spending
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17,31 so this is the dangerous sequence
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it's not just the sequence of return
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risk it's inflation as well so if
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inflation had not been as bad as what it
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was then then the pain for this family
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if inflation had been zero you know that
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family would have gone down again to
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45,000
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44,500 somewhere in that range and they
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would have been fine but the combination
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of inflation the combination of the
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amount of time that it took brought this
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family down to
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177,000 um $300 so what's what's Enemy
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Number Two for an investor what's Enemy
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Number Two for a rety it's inflation
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it's inflation and then of course you
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know enemy number three is one that
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we're talking a lot about which is
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valuation is the stock market overvalued
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because if if if you're an investor and
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you've just come off a two great years
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boy you'd hate to lose that and if
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you're a retiree and you're trying to
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invest your money
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conservatively the nice thing about um
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becoming financially independent is we
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only have to do that once in our lives
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and once we become financially
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independent then job number one be comes
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don't lose our financial Independence so
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valuation of the stock market is really
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important as we're thinking about our
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long-term asset allocation I am not
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saying you should time the market but
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what I am saying is you should take
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current valuations into mind when you're
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thinking about what your long-term asset
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allocation is going to be so let's look
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at asset allocation we really have
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there's there's two valuation measures
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that I have a lot of respect for the
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first one was developed by Professor
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Robert Schiller of yell
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University and it's it's it's called the
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the the cape ratio the cyclically
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adjusted PE ratio don't let that scare
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you off it's basically a 10-year average
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of how much investors are willing to pay
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for a dollar of earnings from a company
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so it's the 10-year average price to
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earning ratio and and here we can see
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what that is um so in January AR of
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2024 that number was uh
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32.2 it's risen since then as we all
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know the stock market in 2024 was up
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over
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20% but even at the beginning of 2024
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that was one and a half standard
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deviations above what the norm has been
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so because it's a 10year number it's not
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going to dramatically increas but it is
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going to increase that number so by
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Schiller's definition we are at his
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historically High valuations the other
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investor I really like to follow and I
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know a lot of folks do is Warren Buffett
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and he has some called the buffet
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indicator which he looks at a country's
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total stock market value and divides
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that um by the annual GDP the gross
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domestic product of that country and so
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as of May of
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2024 that number was about 2x so the
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stock market value back then was
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55.8 trillion
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the US economy back then was a little
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over
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8028 trillion so that gives us a ratio
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of 2x and you can see here that puts us
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you know unfortunately about two
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standard deviations away so is the
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market expensive you know a lot of
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people will mince words on this but yeah
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I think historically it is expensive I'm
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not going to mince words does that mean
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the Market's going to correct does that
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mean there's going to be a drop in the
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stock market Market I don't know I wish
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I had that Crystal Ball but I don't have
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that but by historic measures the stock
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market is
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expensive now every time when the stock
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market gets expensive there could be
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reasons for it right when the internet
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first came out forget about the dot
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companies but for everyday mom and pop
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companies for uh Fortune 500 companies
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the internet allowed those compan all of
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the companies all of us to work better
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faster and get more done than ever
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before and now we have ai coming into
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the equation which is the ability to
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again do more hopefully less expensively
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so it's important that all of us keep
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our skills up keep up this latest trend
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of AI I do think is significant another
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thing that's significant that is in our
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control is when we think about retiring
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and that's why I made this video up here
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why waiting the 65 to retire might be a
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big mistake thanks for watching this
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video bye-bye
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